Japan, Australia clinch trade deal as U.S.-Tokyo talks heat up

Australia's Prime Minister Tony Abbott (front L) reviews a guard of honour with Japan's Prime Minister Shinzo Abe during a welcome ceremony hosted by Abe at the state guest house in Tokyo April 7, 2014.

Credit: Reuters/Yuya Shino

TOKYO (Reuters) - Japan and Australia clinched a basic trade deal on Monday to cut import tariffs, as U.S. and Japanese officials stepped up efforts to reach a parallel agreement that would re-energize stalled talks on a broader regional pact.

The agreement between Japan and Australia comes as the United States and Japan push for their own two-way trade deal - a key component of a broader U.S.-led Trans-Pacific Partnership (TPP) pact - before a visit this month by President Barack Obama.

Australian Prime Minister Tony Abbott and Japanese Prime Minister Shinzo Abe confirmed a basic agreement on the deal at talks in Tokyo, and agreed to work towards signing it as soon as possible, the two sides said in a statement.

"The Japan-Australia EPA (economic partnership agreement) is an extremely important framework that promotes bilateral trade and investments," Abe later told a news conference with Abbott.

"This basic agreement has historical significance for getting the two countries closer together."

The bilateral deal, expected to be finalized when Abe travels to Australia in July, features cuts to Japanese tariffs on Australian beef - including a halving of the levy on frozen beef to 19.5 percent with deep cuts in the first year - and an end to an Australian duty on cars.

A deal with Australia that lets Japan keep even reduced tariffs on politically sensitive agricultural products such as beef gives Japan ammunition against U.S. demands to scrap tariffs in the TPP deal, which aims to remove import levies, experts said.

Such a deal means "Australia gets preferential treatment over the U.S., and America will be under pressure to strike a TPP deal short-term that puts it on a level playing-field with Australia," said Aurelia George Mulgan, a professor of Japanese politics at the University of New South Wales.

Australia had a lower hurdle on tariffs for Japanese cars after Australia's three remaining carmakers - Toyota Motor Corp, General Motors Corp and Ford Motor Co - decided to quit Australian domestic production by 2017 due to high costs and a strong Australian currency.

U.S.-JAPAN "GAME OF CHICKEN"

U.S. Trade Representative Michael Froman leaves on Monday for Tokyo, his office said. He will meet Economy Minister Akira Amari on Wednesday, Japanese media said, in a bid to break a bilateral stalemate bogging down the 12-nation TPP talks.

Washington and Tokyo are each urging the other to be more flexible on the sticking points of access to Japan's farm and car markets and U.S. tariffs on imported cars and trucks.

The TPP is a centerpiece of Obama's push to expand the U.S. presence in Asia. The talks have entered their fifth year. The Japanese and U.S. economies dominate the grouping, which encompasses one-third of global imports and exports.

"What is going on is a game of chicken," Mulgan said. The U.S. and Japan "want an agreement but they are not prepared to pay a high price. Japan knows that America wants it on board because TPP without Japan is not worth all that much. Japan is playing hardball."

The United States wants Japan to open its rice, beef and pork, dairy and sugar sectors - areas Abe has vowed to defend. Japan wants a timetable on U.S. promises to drop tariffs of 2.5 percent on imports of passenger cars and 25 percent on light trucks.

Advocates say the TPP could accelerate global economic growth, boost U.S. exports and level the playing-field between emerging and rich nations in. The TPP talks, including Canada, Mexico, New Zealand, Malaysia and others, missed a deadline for an agreement by the end of last year.

Abe and Abbott also stressed close security ties as Japan seeks tighter relations with regional partners to cope with a rising China. They agreed to start talks on cooperation in defense technology and equipment, following Japan's recent overhaul of a decades-old ban on arms exports

"The relationship between Australia and Japan is about much more than economics and trade and growing wealthy together," Abbott said at the news conference. "It's about respect, it's about values and that's why this is such a very strong partnership."

In a symbolic gesture, Abbott became the first foreign leader to attend a special session of Japan's National Security Council, set up last year to coordinate policies.

"I think this fact that we are having this session with you signifies the fact that there is a strong bond of trust between Japan and Australia," Abe told Abbott at the beginning of the session.